Why it pays to use a personal loan to pay off credit card debt
It’s about making your debt more affordable.
- Credit cards are notorious for charging high interest rates.
- Personal loan interest rates can be far cheaper, especially if you have good credit.
Many people get into credit card debt for one reason or another. For some, it’s about getting stuck with emergency spending. For others, it’s about losing track of spending.
No matter why you landed in credit card debt, your goal should be the same — to pay off that debt as quickly as possible to minimize the interest you incur on it. But one tactic you might want to use in the process of paying off your credit cards is to take out a personal loan and use the proceeds from that loan to clear your balance. That’s why it’s a smart move — even if it means swapping one type of debt for another.
A personal loan could cost you less
A personal loan allows you to borrow money for any reason, just like you can use a credit card to pay for a variety of expenses, from groceries to car repairs to medical bills. Here’s how you can use the proceeds of a personal loan to pay off a credit card balance.
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More: Pre-qualify for a personal loan without hurting your credit score
One benefit of a personal loan over credit cards, however, is that these loans typically charge much less interest. And that could make your debt much cheaper to pay off.
Let’s imagine you owe money on a credit card that charges 18% interest. You may qualify for a personal loan with 8% interest. And the lower your interest rate, the less money you end up spending.
Also, if you have really good credit, you can get a very cheap interest rate on a personal loan. In addition, personal loans come with fixed interest rates, while credit cards usually come with variable interest rates. This means that the interest rate you set when you sign your personal loan is guaranteed to stay the same until your debt is paid off.
A variable rate credit card can mean that you pay more and more interest as your debt is carried forward. The result? A harder time paying off your debts and wasting more money.
How to qualify for a personal loan
Personal loans are unsecured, which means they are not tied to any specific asset that you have pledged as collateral. Therefore, you generally need a decent credit history to qualify for a personal loan.
Well, there are some personal loan lenders who work with applicants who have bad credit. But if that’s the situation you’re in, you need to see what interest rates are available to you. If you have bad credit, the borrowing rate on a personal loan may not be much cheaper than what you pay on your credit card. In some cases it can even be worse.
However, if you are able to snag a personal loan rate comparable to what your credit cards currently charge, it might be worth putting that loan on hold, as that way at least locks in your interest rate. With a credit card, you run the risk of your interest rate going up.
All in all, paying off your credit cards with a personal loan could be a smart bet. It pays to shop around and see what personal loan rates you may qualify for.
The Best Personal Loans of Rise for 2022
Our team of independent experts have sifted through the fine print to find the handpicked personal loans that offer competitive interest rates and low fees. Start reviewing The Ascent’s best personal loans for 2022.